Both Nokia, Microsoft have much to gain, and lose, in mobile deal

Happy couple: Nokia's Steven Elop and Microsoft's Steve Ballmer at the announcement of the partnership

Microsoft and Nokia both have a lot to lose -- and gain -- by their mobile alliance, with the Finnish handset maker deciding to adopt Windows Phone 7 as its smartphone operating system.

The potential gain in this speculated alliance lies in the still-small global smartphone market. Globally, there were "only" about 0.48 billion smartphones in 2010, compared to 3.3 billion feature phones, according to market data from Informa Telecoms & Media. By 2015, smartphones will rise to 1.4 billion units, with the feature phone volume remaining static at 3.3 billion. The biggest opportunity for Microsoft and Nokia is feature phone users trading up to a range of affordable smartphones during the next several years.

The potential loss lies in simply being unable to deliver handsets that lots of consumers will want to buy, no matter how well-reviewed the products may be.

The deal was announced today by Microsoft CEO Steve Ballmer and Nokia CEO Stephen Elop, a former Microsoft executive who became the first non-Finnish chief executive at Nokia in the fall of 2010.

Investors' assessment of the news was immediate: Nokia's stock price dropped by as much 12%. According to some reports, the drop was viewed by traders as a de facto acknowledgement that Nokia's Symbian-based smartphone strategy had failed, stirring fears that Nokia now might be too far behind Apple and Google to catch up.

Two mobile losers?

One of the memes pumping through the Internet commentary now is that the Microsoft-Nokia deal is an alliance of two mobile losers. But that's only true if your focus is on the past, according to Ramon Llamas, senior research analyst, mobile devices, at IDC. "The past track record [of both companies], is what people remember," he says.

But Microsoft has re-invented a distinctive, intuitive mobile user interface for phones, one that sets it apart from Google's Android and Apple's iOS, Llamas says. And Nokia's newest N series (including the N8) and E series (including the upcoming E7) show the company's design and manufacturing prowess. "They are very cool and very popular phones overseas," Llamas says.

Nokia has struggled to repeat its feature phone success with smartphones. Though it remains the mobile phone leader globally, most of those are feature phones. In the U.S. market, it has remained almost invisible, both as a consumer and an enterprise phone brand.

After jointly developing the Symbian phone OS, Nokia spun that firmware platform off as an open-source project, but it has failed to gain the allegiance of software developers as has Google's Android and Apple's iOS platforms. Partly in response, Nokia launched development of the Linux-based Maemo OS, and then recently merged it with a comparable OS project from Intel, Moblin, to create a high-end mobile platform called MeeGo. MeeGo is likely finished as a smartphone platform, but it may continue as the software for tablets or other larger devices.

With Windows Phone 7, Nokia doesn't have to re-invent its own firmware: Microsoft has already done that. The reviews were generally positive and so far Windows Phone has solid support from the Microsoft developer community. Nokia has acknowledged that its Qt development tools, acquired from Trolltech, will not support Windows Phone 7. Symbian and MeeGo programmers will have to make use of Microsoft's free tools including Visual Studio 2010, Expression Blend, Silverlight and, for games, XNA Studio.

One implication of the new alliance for developers is that C# (or more technically the Common Intermediate Language) now has the potential to become "the universal language for mobile development," tweeted free software advocate (and Novell Vice President of Developer Platform) Miguel de Icaza. He co-developed the GNOME project, a free desktop environment and component model for Linux and other Unix-like operating systems, which later incorporated a free software implementation of Microsoft's .Net Framework, called Mono.

HTC, Samsung and LG all created handsets for Windows Phone 7, partly because the Microsoft OS gives them an alternative to Google Android for competing with Apple iOS.

"The decision [by Nokia] not to go with Android is an interesting one, with Elop citing the platform as being too commoditized/democratized and difficult to create differentiation and good margins," says David McQueen, principal analyst at Informa Telecoms & Media.

The critical success factor may be how well and how quickly two large companies with distinct and different ways of doing business can coordinate their efforts. "It's hard enough for massive companies to innovate on their own much less with another massive partner with a completely different culture," says Informa Telecom's McQueen. "Whether Steve Ballmer and Elop can be the white knights that the operators are looking for will depend largely on the ability for Nokia and Microsoft to execute their partnership effectively."

A similar past alliance between Microsoft and Motorola, for the earlier Windows Mobile operating system, was unsuccessful, says mobile consultant and developer Douglas Bollling.

"If the new Nokia CEO can force his engineers to actually work willingly with Microsoft, then things may work out fine," Bolling says. But that alone won't be enough. "If MS wants this partnership to work, they'll have to change their attitude of 'knowing everything' and [of] not needing to listen to their OEMs. This would be a huge change for Microsoft."

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